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Zambia Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views

Economic growth in Zambia will begin to recover over the months ahead as improving rainfall raises agricultural output and domestic power supply. We expect that copper mining sector activity will tick upwards, as gradually rising copper prices encourage firms to raise production, and will provide a modest boost to economic activity over the next 18 months. Headline inflation in Zambia will subside gradually over 2016 and 2017 on the back of increased currency stability and slowly falling food prices. Cooling inflation will allow the Bank of Zambia to move away from hawkish policy in order to stimulate domestic demand. Zambia’s budget deficit will begin to narrow over 2016 and 2017 as the government implements sharp subsidy cuts. While negotiations with the IMF are likely to be delayed by the opposition United Party for National Development’s decision to contest election results in the constitutional court, we expect an agreement will be finalised in the months ahead, further supporting debt sustainability. Zambia’s current account deficit will begin to narrow in the months ahead as rising domestic copper production boosts export growth and increased rainfall eases food and power imports. The gradual uptick in financial account flows, as a result of rising foreign direct investment into Zambia, will be more than sufficient to fund this narrowing external account shortfall in the years ahead. The Zambian kwacha will trade sideways through to year-end and will appreciate modestly over 2017. While elevated inflation will offset improving trade dynamics over the rest of 2016, leading to range bound trade, loose developed market monetary policy will drive capital inflows and will see the kwacha strengthen over 2017. Social unrest will remain elevated in Zambia in the coming weeks, after Edgar Lungu’s narrow win over opponent Hakainde Hichilema in the August 11 presidential elections. While the government will maintain a more investor friendly policy toward the mining sector, we expect that sentiment will only slowly improve in the wake of sclerotic mining sector policy during Lungu’s prior term. Major Forecast Changes While we had initially expected an additional 200bps of hikes this year before the Bank of Zambia hit the top of the hiking cycle, slower-than-expected economic growth and the Bank of Zambia’s move away from hawkish language in its policy statements in recent months have encouraged us to amend our forecast. We now forecast that the bank will keep the benchmark policy rate on hold at 15.5% over 2016 and 2017. We believe that the government’s subsidies cuts as well as gradually improving revenues from the copper sector will see Zambia’s fiscal deficit narrow at a faster pace over 2016 than we had initially expected. We now forecast a fiscal deficit of 6.6% of GDP over 2016 compared to our previous forecast of 7.8% over the same period. We have revised our forecast for Zambia’s current account deficit from 7.5% and 6.3% of GDP over 2016 and 2017 respectively, to 6.3% and 4.9%. We believe that improving rainfall will temper imports of food and power and will ease pressure on the current account balance.

Table Of Contents

Zambia Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Agriculture, Power And Copper Will Drive Economic Recovery................................................................................................8
Economic growth in Zambia will begin to recover over the months ahead as improving rainfall raises agricultural output and domestic
power supply. We expect that copper mining sector activity will tick upwards, as gradually rising copper prices encourage firms to raise
production, and will provide a modest boost to economic activity over the next 18 months.
GDP By Expenditure Outlook.................................................................................................................................... 8
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS....................................................................................................................................................9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.........................................................................................................................................9
TABLE: FIXED INVESTMENT FORECASTS............................................................................................................................................................9
TABLE: NET EXPORTS FORECASTS......................................................................................................................................................................9
Monetary Policy........................................................................................................................................................ 10
Cooling Inflation Will Keep Rates On Hold.................................................................................................................................10
Headline inflation in Zambia will subside gradually over 2016 and 2017 on the back of increased currency stability and slowly falling food
prices. Cooling inflation will allow the Bank of Zambia to move away from hawkish policy in order to stimulate domestic demand.
Monetary Policy Framework.................................................................................................................................... 11
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................11
Fiscal Policy And Public Debt Outlook.................................................................................................................. 12
Narrowing Deficit And IMF Package Will Ensure Debt Sustainability......................................................................................12
Zambia's budget deficit will begin to narrow over 2016 and 2017 as the government implements sharp subsidy cuts. While negotiations
with the IMF are likely to be delayed by the opposition United Party for National Development's decision to contest election results in the
constitutional court, we expect an agreement to be finalised in the months ahead, further supporting debt sustainability.
Structural Fiscal Position........................................................................................................................................ 13
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................14
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................14
External Trade And Investment Outlook................................................................................................................ 15
External Position Set To Recover Gradually..............................................................................................................................15
Zambia's current account deficit will begin to narrow in the months ahead as rising domestic copper production boosts export growth
and increased rainfall eases food and power imports. The gradual uptick in financial account flows, as a result of rising foreign direct
investment into Zambia, will be more than sufficient to fund this narrowing external account shortfall in the years ahead.
Outlook On External Position.................................................................................................................................. 16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE......................................................................................................................................... 16
TABLE: TOP 5 GOODS IMPORTS IN 2015............................................................................................................................................................ 16
TABLE: TOP 5 GOODS EXPORTS IN 2015........................................................................................................................................................... 16
TABLE: CURRENT ACCOUNT BALANCE FORECASTS....................................................................................................................................... 17
Currency Forecast.................................................................................................................................................... 18
ZMW: Kwacha To Recover On Gradually Rising Investor Sentiment.......................................................................................18
The Zambian kwacha will trade sideways through to year-end and will appreciate modestly over 2017. While elevated inflation will offset
improving trade dynamics over the rest of 2016, leading to range bound trade, loose developed market monetary policy will drive capital
inflows and will see the kwacha strengthen over 2017.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................18
Chapter 2: 10-Year Forecast................................................................................................................... 21
The Zambian Economy To 2025.............................................................................................................................. 21
Mines Both A Driver Of And Risk To Growth..............................................................................................................................21
On the back of an improving regional outlook and improving prospects for the mining sector, we are projecting average annual growth
of 5.6% over our forecast period to 2025. Buoying this strong performance will be a strengthening private sector, as well as ongoing
investment in mining, agriculture and infrastructure, aided by a favourable business environment.
TABLE: LONG-TERM MACROECONOMIC FORECASTS..................................................................................................................................... 21
Chapter 3: Political Outlook................................................................................................................... 23
SWOT Analysis......................................................................................................................................................... 23
BMI Political Risk Index........................................................................................................................................... 23
Domestic Politics..................................................................................................................................................... 24
Investor Sentiment To Improve Only Gradually On Policy Uncertainty...................................................................................24
Social unrest will remain elevated in Zambia in the coming weeks, after Edgar Lungu's narrow win over opponent Hakainde Hichilema
in the August 11 presidential elections. While the government will maintain a more investor friendly policy toward the mining sector, we
expect that sentiment will only slowly improve in the wake of sclerotic mining sector policy during Lungu's prior term.
TABLE: POLITICAL OVERVIEW............................................................................................................................................................................. 24
Long-Term Political Outlook................................................................................................................................... 26
A Question Of Policy, Not Politics...............................................................................................................................................26
Zambia boasts a competitive political environment that has been characterised by closely contested and increasingly freer and fairer
elections (according to observers). However, issues such as corruption and income inequality will require redress over the coming
decade, in order to keep Zambia on a progressive political and economic growth trajectory.
Chapter 4: Operational Risk................................................................................................................... 29
SWOT Analysis......................................................................................................................................................... 29
Operational Risk Index............................................................................................................................................ 29
Operational Risk....................................................................................................................................................... 30
TABLE: OPERATIONAL RISK................................................................................................................................................................................. 30
Market Size And Utilities.......................................................................................................................................... 31
TABLE: SUB-SAHARAN AFRICA - MARKET SIZE AND UTILITIES RISK............................................................................................................ 32
Labour Costs............................................................................................................................................................ 36
TABLE: REGULATIONS GOVERNING FLEXIBILITY OF WORKERS.................................................................................................................... 36
Chapter 5: BMI Global Macro Outlook................................................................................................... 41
Global Macro Outlook.............................................................................................................................................. 41
EMs Past The Worst, But Structural Problems Persist.............................................................................................................41
TABLE: GLOBAL ASSUMPTIONS..........................................................................................................................................................................41
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %.................................................................................................................................. 42
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %.................................................................................................................................43
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................45

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